Exit Options & Wealth Transfer Alternatives During Recessionary Periods

Ephor Newsletter Q2 2023

As we complete Q1 of 2023 and proceed towards the remainder of 2023, what we do know is that there will continue to be significant uncertainty and "increasing risk profiles" affecting every aspect of our lives & businesses including, the most recent bank failures combined, with ongoing inflationary costs, labor challenges, higher interest rates, increased government influence, just to add to the ongoing general "disruption in our markets".
 
Therefore, it is clear, and we must accept, that the "risk profiles" of our businesses and the risk associated with the ongoing success of our businesses will continue to be problematic at best, and something we need to take overt action on.

We as leaders and CEO Entrepreneur’s must effectively manage and transfer these risks to protect the stakeholder value that we have accumulated during the past "robust economic" times. How we effectively manage these risks will be "material" to not only our businesses future success, but as important, to our personal financial well-being as well.

At Ephor we have been operating, advising, stewarding, governing, and investing in services businesses for over 20+ years now. As such we have "experienced" several recessionary and "disruptive" periods where "risk profiles" have increased and have been effectively managed. This experience and earned knowledge have provided us with some "knowns" that we as stakeholders must consider to "transfer some of the current risks" to others.

As such, Ephor provides the following "guidance and commentary" on initiatives that have proven to be very effective in the transfer of risk during turbulent times.

Therefore:

  • If you are an "aged" Founder/CEO Entrepreneur who desires to exit their business in the 3-5 years, your risk management initiatives fundamentally separate into 2 distinct categories:

  • Operational and Business Model Efficiency:

    • Convert as much of your Fixed Costs to Variable Cost

    • Outsource as much of Non-Mission Critical Functions as possible.

    • Focus on Customer Retention and creating "Recurring Revenue" streams.

    • Increase Gross Profit Margins while increasing "Recurring EBITDA Performance."

    • In general, improved or increased productivity & more efficient operating performance always decreases the risk profile of any service business

  • Shareholder Wealth Transfer Initiatives:

    • Leverage the Balance Sheet: if the company enjoys an "attractive" balance sheet; despite increases in interest rates: Ephor suggests to wealth transfer (as such risk transfer, the "execution risk") to Banks, non-Banks, the SBA and/or other sources of debt capital to small businesses. This wealth transfer concept often transfers "a material portion" of the value of your business to your personal balance sheet. At Ephor we have worked with numerous entities where this initiative has proven over the long term to be an effective risk management initiative.  

    • Sell a Minority Equity Interest: an effective "investment risk" management initiative is to sell a minority interest in the company’s equity. Depending on the unique situation we have experienced "Founder" success via the following types as "Minority Investors":

      • Marketplace Strategic Partners: Your marketplace partners are always a "good choice" and provider of wealth transfer capital.

      • Institutional Minority Equity Investors: over the past 3-4 years due to all the "disruption" the number of providers of institutional minority capital that is "Useful Capital" is increasing. Recently we have seen very attractive terms and conditions for "Founders" by this provider group.

      • Private Placements: it is always a good option to sell a minority interest in the company (in this case <16%) to the key leadership team members: local economic development groups, or others that are "stakeholders" of the business.

2. If you are a Founder or CEO Entrepreneur "who has just had enough" or for whatever reason(s) chooses to "Exit Now": That "optionality" includes the following "best alternatives":

  • Merge Transactions: during disruptive times, it is well known that "Values are either stagnate or depressed" therefore due to the SG&A and other synergies: Merge structures are proven to maximize values, and as such are excellent "wealth transfer and risk transfer" venues.

  • Sell Majority Interest: The best buyers of the equity in the company (from a seller’s perspective) during turbulent valuation periods are again product, marketing and/or distribution partners that appreciate value of your customer base and the opportunities to lower the buyer’s customer acquisition costs. Ephor strongly suggest that this alternative has proven to be the best "home for the assets".

  • Other Alternatives specific to "your situation"; often Ephor has experienced that "customizing" the exit structure to fit the specific situation is feasible. These structures can include ESOP: Asset Sales: Public/Private Partnerships, etc.


To Conclude:
In general, Ephor strongly advises the CEO Entrepreneur during disruptive times of this nature: to not retain Investment Bankers or participate in "auction processes". The buyout community currently (and in the near term) will be "value-oriented" and simply is not the best venue for you the CEO Entrepreneur to maximize the value of your entity.

We at Ephor recognize & clearly understand that each business and each CEO Entrepreneur situation is "special" and needs some customization and specific deployment of knowledge and skill.
Therefore, we at Ephor would invite you to visit our website specifically the Knowledge Library section which includes white papers on "Founder & Shareholder Exit and Liquidity Options" and "Useful Capital & Founder Friendly Financing During Inflationary Times".

Likewise, if you would like to have a brief chat to discuss your particular situation on "Strategic Clarity", please contact us below.

Good Luck in Q2 2023 and Beyond!


Garry E. Meier
Strategic Advisory Practice Lead